(GS3: Economics)
- Recently, a majority of four judges on a Constitution Bench of the Supreme Court (SC) found no flaw in the government’s process to demonetise 500 and 1000 banknotes through a gazette notification issued on November 8, 2016.
Majority Ruling:
- Constitutionally valid: The majority held that Centre’s notification dated November 8, 2016 is valid and satisfies the test of proportionality.
- Valid intention: The judgment said the decision-making process was not flawed merely because the procedure emanated from the government.
- No overnight phenomena: The decision came up after six month consultation between the Reserve Bank of India and the Union government.
- The statutory procedure under Section 26(2) of the RBI Act was not violated merely because the Centre had taken the initiative to “advice” the Central Board to consider recommending demonetisation.
- On hasty decision, the court said such measures undisputedly are required to be taken with utmost confidentiality and speed
Minority Ruling:
- The government could have issued a notification under Section 26(2) of the RBI Act only if the RBI had initiated the proposal to demonetise by way of a recommendation. Therefore, the government’s notification issued under Section 26(2) of the RBI Act was unlawful.
- If the Board’s opinion was in the negative, the Centre could still go forward with the demonetisation exercise, but only by promulgating an ordinance or by enacting a parliamentary legislation.
Demonetisation issues:
- Black money is not just cash:This sudden demonetization was premised on the idea that “black means cash”. And, it is in high-denomination currency notes that black money would be held.
- Benami transactions whitens black money:The truth is that illegal cash transaction, though black money, constitute a very small proportion of the black economy.
- Much cash was accounted: Much of the prospected cash in circulation including a major chunk of ‘black money’ was collected back by the RBI.
- Wealth is dispersed: The wealth is held in a variety of forms like, in undervalued inventory or balances held in tax havens abroad. A return is expected from this wealth. So, cash, on which there is no return, would be a tiny amount – 1% of the black wealth.
- Schemes were exploited: Deposits in Jan Dhan accounts suddenly swelled as the poor were used as cash mules. Some bankers were caught helping their rich clients do this. There was a 30% charge for this. As a result, new black incomes got generated.
Benefits:
- Fake Notes and black money issues were effectively tackled.
- Digitisation of economy: In the initial days of trouble conducting business in the face of an acute cash crunch, more and more entities had to shift to digital to do business.
After the return of the cash, the growth in digital payment had been modest.
- Supported in the Pandemic: The creation of digital infrastructure post-demonetisation helped India in coping with the pandemic.
- As the tools for faceless transactions were mostly in place, it became easier to move towards contactless transactions.
